So much for China (
) leading a plunge in copper (
) prices as inventories tied to collateral for loans were being
dumped. Industrial growth globally is near multi-year highs
across Europe US and much of Asia.
Even without China providing sensational demand, they are still
40% of the world's copper demand and have continued to
buy. The excitement for market players has increased
as China has delivered solid if not impressive data in the last
month, including the first expansionary PMI in six months.
We have often discussed the "stealth stimulus" going on China
via the currency, specialty lending and the RRR cuts. We would
argue there is more to come. In addition to China
there are other forces weighing on copper demand: Auto sales
globally are at record highs and housing recovery is more than a
concept in the US and much of Europe - it's happening. As a
result spec longs in copper have increased over the last two
weeks according to data by the CFTC.
Copper may be the best relative value trade in the industrial
metals space. Nickel prices spiked last year and have held
multi-year highs. Aluminum has rebounded along with auto sales
and industry wide supply discipline finally settling in. People
tend to lump copper producers in with coal and ore producers
because of the China demand factor.
This is wrong for reasons that are the underlying market is
broader but also because there is not a structural over-supply of
copper as there is ore and coal. Also after years of challenging
conditions and over capacity built at the peak, ore and coal
producers largely have balance sheets that under major duress if
not facing bankruptcy, while copper players look very
), Norilsk Nickel (
), and other core players outside of copper have charts that are
near multi-year highs or at them. Valuations are pricing in EPS
expansion as spot prices have trended higher. Copper producers
have not been afforded that luxury and their share prices reflect
investors' concerns on macro growth.
A basket of names that exposes investors to global copper
demand growth with some diversification into energy, zinc, and
other metals includes: Freeport Mac (
), Teck Resources (
), Southern Copper (
). Globally a copper basket should include: Kazakmys and
Antofogasto on the HKG exchange.